In May of 1999, David was visiting stores — but with caution.
He was on a mission.
He was buying Healthy Choice puddings.
Each cost only $0.25. In 1999, that translated to about Rs 10.
David was not buying 1 or 2 units of Healthy Choice puddings. He was trying to accumulate thousands. And sellers were always trying to know why he wanted so many puddings.
He would tell them he was preparing for a doomsday scenario (Y2K).
In 1999, people believed a disaster was upon the world as the year would go from 1999 to 2000 and computers were not designed to handle that.
Predictions were made about banking system computers, flight computers, electricity grid computers — everything would stop working. And the world would descend into chaos.
This was not true though. The issue was handled much in advance and no real problems happened.
But the fear was real.
David, however, was not worried about Y2K. He was using that as an excuse to buy thousands of puddings.
He managed to buy over 12,000 Healthy Choice puddings. Total cost: a little over $3,000.
Then, he, his wife, kids, and a few other helpers began the hard work. They started peeling the pudding cups and tearing off the wrappers.
He raced against time – he wanted to mail the wrappers to the company before May 1999 ended.
What was happening here was an exploit.
Healthy Choice had come up with a scheme to increase their sales.
For every 10 wrappers, they would give the pudding buyer 1,000 miles of air travel. They hoped this would help increase the sales of the pudding without incurring crazy high marketing costs.
David’s sharp eye had done the maths. By spending about $3,000 on puddings, he would be able to have about $1,50,000 worth of air miles.
May 1999 was the deadline.
He succeeded.
For 7 years, he and his family travelled all over the world to over 40 countries. It was a fantastic arbitrage opportunity.
Arbitrage is often considered a risk-free trade. It is not. But it can get close to being risk-free sometimes.
Arbitrage is buying something from one place and selling it to another place where it is priced higher.
For an arbitrage trade to work, the same item must be priced differently in the two different places.
So you can buy cheap, and sell expensive.
Why is it considered risk-free by some?
Because it does not matter if the share or real estate or asset is inherently a “bad” investment or a “good” one.
All that matters is that a price difference exists. So you can take advantage of it.
Of course, if you think carefully, it is not risk-free. What if you buy from a cheaper place and the price goes down before you can sell? What if there are no buyers? Other similar risks exist.
But if those parts are taken care of, the risk is low.
What David did was find air miles for cheap: when he bought them using puddings instead of buying tickets from the airline.
One can imagine, the company that rolled out this offer would probably not be very happy about this. But that’s a story for another day.
They would have changed their terms and conditions after this arbitrage opportunity surfaced. Many other companies would have learnt a lesson and tweaked their own terms and conditions.
Such arbitrage opportunities exist in all kinds of investment options: share markets, bond markets, forex, even real estate.
In fact, many fund managers and institutional investors specialise in finding and taking advantage of arbitrage opportunities.
Arbitrage
We observe this in the share markets.
Many institutional investors run arbitrage funds. They buy stock from an exchange where it is cheaper and sell on an exchange where it is more expensive.
Because of the increased buying (from one exchange), and the increased selling (on the other exchange), the price on both exchanges starts changing.
Eventually, the price on both exchanges becomes the same.
This is why you will notice share prices on both exchanges are slightly different.
But it is very hard to profit from this as an individual investor.
Institutional investors with super-computers execute trades in milliseconds and take advantage of arbitrage trade opportunities.
In one way, they play a crucial role in ensuring the share price remains even everywhere.
Similarly, some investors do this across different countries too – many times companies’ shares are listed on different countries’ stock exchanges.
This happens in all kinds of assets – like in forex.
Many times, sharp investors notice exchange rates varying.
Let’s say,
-GBP-INR exchange rate is Rs 120.
-AUD-INR exchange rate is Rs 50.
But the GBP-to-AUD exchange rate is 2 (meaning 1 GBP buys 2 AUD).
This means, if you want 1 GBP (Great British Pound), you have to spend Rs 120.
But, if you buy AUD first, and then using that, you buy 1 GBP, you will have to spend only Rs 100.
So, instead of spending Rs 120, you will spend Rs 100.
This is an example of an arbitrage trade in forex (all values are examples only).
Similar to stocks, this happens at lightning speed making it difficult to take advantage of by the individual investor.
One common way many regular individuals take advantage of arbitrage is in real estate.
They compare rental yield vs buying price.
Let’s say a person stays in Pune:
In Pune:
A 1200 sqft flat costs Rs 1cr.
Rent for this is Rs 4.2 lakh per year = 4.2% rental yield.
But in Hyderabad:
A 1200 sqft flat in Hyderabad costs Rs 1cr.
Rent for this is Rs 6 lakh per year = 6% rental yield.
What this person does is he buys a flat for Rs 1 cr in Hyderabad and rents it out.
Using the rent, he lives in a rented flat in Pune. Since the rent he earns is higher than the rent he pays, he makes some extra cash.
This is an extremely simplified example where taxes, maintenance, etc are not considered. Price appreciation is assumed to be the same in both cases.
Similarly, some investors rent a house and then invest the money in another asset altogether where the yield is much higher (like his own business, or a stocks portfolio, etc).
Is this an example of arbitrage? Kind of – some would say yes, and some no. Because, say whatever, two flats in two different cities are never going to be exactly the same.
But loosely speaking, it is an example of arbitrage.
Arbitrage has many versions, especially if we make the definition even more loose. It’s not always the unit pricing that is considered. Sometimes it's simply better value.
Two phones cost the same. One of them is just better overall despite costing the same.
This is an example of arbitrage in value.
Quick Takes
+ China has agreed in principle to reopen the Shipki-La border trade route in Kinnaur, Himachal Pradesh, which was closed in 2020.
+ India’s crude oil imports fell 4.3% year-on-year to 18.56 million metric tons in July. This is the lowest level of crude imports of India since Feb 2024.
+ OYO is planning to file its Draft Red Herring Prospectus (DRHP) with SEBI in November, with a valuation of $7 billion to $8 billion. This is as per various media reports.
+ Ardee Engineering got SEBI’s approval for a Rs 580 crore IPO.
+ The US President's 50% tariffs on Indian goods came into effect today (27 Aug). In response, India launched an export outreach campaign targeting 40 countries, including the UK, Japan, and South Korea, to boost textiles and cut reliance on the US market.
+ India-Africa trade surpassed $100 billion in FY 2024-25, with India becoming one of the top 5 investors in the continent: Union Minister Kirti Vardhan Singh.
+ India has extended the import duty exemption on cotton till 31 Dec 2025. Earlier, the exemption was till 30 Sept.
+ India’s GDP grew 7.8% year-on-year in the April-June quarter (vs 7.4% in the Jan-March quarter).
+ India’s forex reserves fell by $4.38 billion to $690.72 billion in the week that ended on 22 Aug.
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest